When you begin focusing on your finances and preparing to build wealth, it’s imperative that you create a financial statement. You have to know where you are at, so you can build a plan to get where you want to be. It is shocking the number of people who have never heard of a financial statement or have never created one for themselves. I am here to help you, so today, that’s exactly what I am going to be teaching you.
Remember, even if you have a lot of wealth, you still need to create a financial statement. Again, you have to know where you are at, so you can build a plan to get where you want to be.
The Importance of a Financial Statement + How to Create One
The How
When you are creating your financial statement, you will have two main categories: assets and liabilities. Assets are things that generate income for you, such as real estate, a business or stocks. Liabilities are the total amount you owe on each item. Don’t just list the monthly payment. When you subtract your liabilities from your assets, you will have your net worth.
Anytime an asset or a liability changes, you must update your financial statement. It doesn’t have to be really technical, but it has to list out everything.
The Why
First of all, an updated financial statement will show you the ratio of your debts to your income. When you begin to work on building wealth, or achieving the “First X”, as outlined in my book, Money Mastery, you have to have your assets be more valuable than your liabilities. In other words, you need to be making more money than the debt that you have. As you begin to pay off your debt, your income will increase, and you will reach the “Second X”. Many people ask what their next step is after reading my book, and this is it.
Secondly, you can earn some money from the assets in your net worth. A conservative estimate would land around 5% withdrawal from your net worth annually. You can see that knowing your net worth, and your assets, can really help you financially.
A Note on Debt
The biggest thing you can do to increase your net worth is to decrease your debts. For some people, the main source of debt on their financial statements are real estate. That debt is okay because real estate is an asset, however, if you have any kind of consumer debt, you have to pay it off.
Paying debt off is one of the first steps to reaching financial freedom, but it can be really hard for people, especially those who don’t have a lot of wiggle room in their budget. I suggest that you use the “debt snowball” technique. First, you need to set up a monthly budget. If you have room to pay more than the minimum payment on your smallest debt, do that! If no, focus on making the minimum payment on all your debts each month.
Focus on your smallest debt first, because it will be paid off the fastest. Once your smallest debt is paid off, use the money you would normally pay monthly on that debt, and apply it to your next smallest debt. You keep doing this over and over again until you have no more debt. You can see how this technique can accelerate your debt repayment.
Creating a financial statement is fundamental to reaching financial freedom. I hope you can see the importance of this activity. How do you keep track of your finances?
